Green – Federal Court of Appeal states that an upper-tier partnership should not compute its income

CRA considered that business losses incurred by lower-tier partnerships (the PSLPs) were deemed to be limited partnership losses of an upper-tier LP (MLP) – which meant that they were effectively trapped in MLP given that s. 111 (and, thus, the ability to deduct limited partnership losses under s. 111(1)(e)) was only available to a taxpayer and not to a partnership such as MLP. Webb JA rejected this interpretation and considered that the PSLP business losses were also business losses rather than limited partnership losses in the hands of MLP, so that such losses could be allocated to the MLP partners in the same manner as if they had been generated in a single-tier LP. In the course of a detailed discussion, he stated:

Since the computation of income for a partnership that is a member of another partnership will cause problems when that top-tier partnership attempts to allocate its income on a source basis to its partners, in my view, Parliament did not intend for a partnership that is a member of another partnership to compute income. Rather, Parliament intended for the sources of income (or loss) to be kept separate and retain their identity as income (or loss) from a particular source as they are allocated from one partnership to another partnership and then to the partners of that second partnership (and so on as the case may be). [emphasis added]

Since MLP was not supposed to compute its income, does this mean that the adjusted cost base of its units do not reflect the income or loss earned by it (but still reflect the distributions made by it out of those earnings) – or in the post-Green world, is the ACB of interests in an upper-tier partnership now an irrelevancy since the partnership is transparent?

Webb JA also stated that the Crown’s concern, “that the at-risk rules could be avoided entirely if the top-tier partnership (MLP) were a general partnership,” was outweighed by other considerations.

Neal Armstrong. Summary of The Queen v. Green, 2016 FCA 107 under s. 96(2.1) and s. 102(2).